DNY59/E+ via Getty Images
Introduction
The CGX Energy Inc. (OTCPK:CGXEF) saga is a couple of years old now. This will be the third time we've covered it. The company is interesting becauseof the concessions they have in Guyana for offshore drilling and the development of a deep water port at the mouth of the Berbice river.
CGX price chart(Seeking Alpha)
In this article, we will catch up with CGX and document the progress of the past year. We will also acknowledge the importance of the company's largest shareholder and banker, Fronterra Energy, (OTCPK:FECCF), the deep pockets of which, make all of this possible. The two companies fortunes are inextricably related, although it should be noted that Fronterra has a real business in other sectors of Latin America. This was discussed extensively in the second article, which should be read by anyone considering taking a position in CGX.
I will state now that CGX is a purely speculative play on their Guyanese acreage bearing fruit. While prospective, it is in no way a slam-dunk. There are miles to go on a winding road, one fork of which could lead to dashed hopes and plundered bankroll if the roll is snake eyes, while another could lead to that mythical slot machine ready to roll 7's.
The thesis for CGX
The Kawa#1 was a moonshot that was drilled to show the channel Exxon Mobil (XOM) has exploited in Guyana has a fan structure offset from the main Fairway of the channel. (Although you will note, CGX generously includes the Kawa#1 in this main channel.) When this was proved out with the successful flow test of Kawa#1, plans were made to delay the Marakapan well on the Demarara block, and then ultimatelyrelinquish the Demarara block, which of course cancelled the next well, the Marakapan#1 This was done in favor of the Wei #1 to appraise the Kawa#1 discovery. Some delays in crossing all the governmental "t's" and dotting the logistical "i's" has led to a six month delay in spudding the Wei#1. The operator - Shell (SHEL) - in Trinidad, delayed releasing the contracted rig - the Noble Corp (NE) Discoverer - due to problems on their well.
Guyana/Suriname Exploration Map(CGX Energy)
As noted above, the Wei #1 is now drilling, and absent problems, there probably won't be a lot of new information released until the flow test-assuming a good hydrocarbon log at TD, sometime in the 3rd quarter. I sayabsent problemsas Wei#1 is not a "stamp it out" kind of well. The pay sand lies some 20K below the mudline and is high pressure, high temperature, meaning it's difficult drilling. It is worth remembering the very experienced team (discussed in the first article) was beset with delays due to well control issues, and ultimately had to abandon a deeper target than the Santonian sand they ended up testing.
Some of the shine has come off Suriname with APA's dry holes at Keskesi#1, and Dikkop. These unexpected results after 5 commercial successes since 2020 have caused APA and partner TotalEnergies, (TTE) to delay the FID, originally scheduled for 2022, to sometime in 2023. This is relevant to the thesis for CGX, as the Corentyne block that is being tested, is just barely in southern Guyanese waters, and is adjacent to Block-58. In relation to Block-58, with a petroleum system estimated at 6.5 bn barrels, I don't think there is any doubt it will achieve FID, but like other options the time decay for value is in effect here.
That's it in a nutshell, as the saying goes. So goes Corentyne goes your investment in CGX. If the Wei#1 tests commercial in a few months, CGX and Frontera will have potential Big Daddy investor/operators lined up outside their doors. In this scenario, I expect the stock to rally substantially, rewarding patient investors. In the dry hole scenario (the track record for fans is spotty, as Repsol, (OTCQX:REPYF) has Dh'd two prior exploration wells in their Kanuku prospect), there might still be hope as the two companies reevaluate seismic and other information to see if there is a fall-back prospect. In that scenario, GCX stock rocks along about where is has been the last year or so, sub-$1.00, to maybe a buck and a half depending on oil spikes.
Updates from the last report
The key update from the last report is the JOA amendment of December, 1st 2022, which:
- Documents the Corentyne block license remains in effect and good standing with the government of Guyana.
- Amended the original Fronterra farm-in agreement that established the JOA and increased Fronterra's percentage ownership of the Corentyne block.
- Documented the dilution of Fronterra's ownership of CGX from 79.59% to 77.05% on a partially diluted basis.
- Documented the plan to spud the Wei #1 by January, 31st 2023.
Your takeaway
Usually in this blog, we feature companies with established businesses and a strong balance sheet. We love cash flow and dividends, and like the concept of share buybacks. The thesis for CGX represents none of that sort of wise, results-based investing we normally do. What's the deal?
I always believe when investing in oil and gas a small portion of your portfolio should be small companies with big dreams, and a plan to achieve them. That describes CGX to a T.
The good news is the moonshot phase is over, and the appraisal phase has begun. We have gone from a s.w.a.g. that Kawa#1 might contain hydrocarbons and prove commercial, to a reasonable suspicion that a well-developed petroleum system may connect Kawa#1 with the Wei #1 location, and might further delineate the extent and direction of this system. That is a big step up in probabilities.
In the success case where the Wei #1 tests well, the 32% of the Corentyne block might suddenly become worth billions of dollars to CGX. It's not a direct line from there to the cash register as I am convinced neither company has the resources to develop Corentyne. That brings up the "Big Daddy" I've mentioned in my last article. An experienced operator - there's a dozen or so who would fill the bill - to take over operatorship. Of course, that will entail a further reduction in CGX's remaining 32%, as Big Daddy would want half of the total to make it worth their while. But, it's the only way.
I've stayed long CGX Energy Inc. now for nearly two years on the prospect that Corentyne might just be ready to be the big winner that starts the lights flashing, the horns blaring, and the sound of coins pouring out of the slot. It will probably take another year or so for the final result to be known, so patience of this sort is required for anyone considering taking a leap into CGX Energy Inc.
I think at current levels, if you agree with me about having a place for a long-shot slot in your portfolio, the risk and reward for CGX Energy Inc. just about balance each other out. Or you could buy a scratch-off, a Bitcoin, or fly out to Vegas and play the slots.
Follow me to learn more about analysis!!
Comments